Depreciation of Indian Rupee - A layman analyses

 

Deep depreciation of the Indian Rupee

A layman tries to understand

Indian Rupee, which was quoting around ₹88 per USD two months back, is now threatening to breach ₹92 levels. And in percentage terms, it is 4.5%. As a layman, I attempt to find out the reasons.

The monthly imports into India now averages around USD 82 billion, of which merchandise imports alone accounts for USD 65 billion. The average monthly exports from India is USD 72 billion and the share of merchandise exports is less than 50%, the range being USD 34-38 billion. Hence on any month, the merchandise trade deficit is still at USD 25-30 billion and the overall trade deficit is reduced to USD 10 billion, thanks to the substantial increase in the dollar revenue from the services sector. When a country is still reeling under trade deficit, it is logical that the value of the local currency depreciates against the major international currency viz. USD, though the percentage of depreciation has come down considerably in the last few years (till two months back). The depreciation can be minimised if the inflows shows a healthy trend on the capital account. Investments by foreign institutional Investor (FIIs) into our equity/debt funds, external commercial borrowings(ECB) by the Indian Inc. and remittances by the non-residents (NRIs) contributed in a large measure to the inflows/outflows in the dollar account. While remittances by the NRIs resulted in net dollar inflows month after month, the inflows by way of ECBs oscillates, but is generally positive. The investment by FIIs fluctuates depending on their sentiments about the state of our economy in the medium/long term, the extent of interest/return differential that they can get vis-a-vis USD and the strength of our currency with the major international currencies. (i) The additional tariff by the US, (ii) the uncertainty hovering around how long the additional tariff will continue, (iii) the narrowing of spread between US bonds and the real exchange adjusted effective return, they get, from their Indian financial assets has resulted in continuous net outflows of USD in the quarter ended Dec’ 25, with the same situation spilling over this month also.  The average monthly USD net inflows into India from NRIs and ECB by the Indian Inc. at any point of time is not in excess of USD 5 billion in a month. Excess net outflows by the FIIs negated the positive net inflows by NRIs/ECB route and when this becomes the add on factor to the trade deficit that India is always in, the depreciation on Indian Rupee has become much faster than the gradual decline, we witnessed, in the last few years. 

Now, RBI scheduled a USD 10 billion USD/INR buy/sell swap auction, with a three year tenor, on 4th Feb’ 26. In this regard, similar auctions for USD 15 billion were conducted by RBI in Dec’ 25. These auctions are primarily conducted to improve the durable liquidity in the banking system and not for calling a halt to the depreciating rupee, any further. The previous auctions helped in reducing dollar-rupee forward premium and had little impact on the spot rate. It is true that the decline in the dollar-rupee forward premium might encourage the Indian Inc to resort to ECB, instead of rupee borrowings, as the cost of currency hedging comes down, effectively lowering their overall borrowing costs. However, the impact of the increase in ECB may have only a limited/negligible impact on the value of the Indian rupee.

To conclude, (a) unless a clarity emerges about the impact of the additional tariff (by the US) on our economy, (b) a trade agreement between India and US is finalised, the fall in the value of the Indian rupee is likely to be as sharp as what we witnessed in the last two months.

Regards

V. Viswanathan 
CGM Retd. e-SBT

30th January 2026